China Mobile: Special Dividend Not Enough

Blue chip China Mobile (941.HK) shares are up slightly this morning against a cratering Hong Kong stock market as investors cheer a special dividend.

Illustration:
Bloomberg News

Shares of the Chinese telco were up almost 1% against a 1.3% tumble by the Hang Seng index. Asian stock markets opened weakly this morning after the S&P500 tumbled overnight as investors jettisoned risk amid escalating U.S.-North Korea tensions. South Korea’s Kospi index is down 2% this morning.

Investors are applauding China Mobile’s decision to finally pay a special dividend - announced with its first half results on Thursday - but Jefferies analyst Edison Lee argues the decision, while good for shareholders, does not change the company’s fundamental outlook and may be just a one-off event.

CM's 20th anniversary special dividend of HK$3.20 is definitely a positive surprise. Since it is for a special occasion, investors will find it hard to gauge if they will receive more than its 46% regular payout in the future. We are also slightly puzzled by why CM did not do this in March, especially since market expectations were "huge" then.

Results exactly in line. Revenue was 1.4% higher than our forecast, driven by mobile data and fixed broadband services. However, higher marketing cost, handset subsidies and depreciation caused its EBITDA and profit to be in line only. Its reported net profit grew 3.5% YoY. But if we strip out China Tower's estimated profit contribution, CM's core business would have grown 2.3% only. Given the worsening competitive outlook and government-mandated tariff cuts, we forecast CM's profit in 2H17 will fall by 1.4% YoY. As we expected, CM is now guiding a 10% increase in handset subsidies from Rmb10.1bn last year. Furthermore, depreciation rose 6.6% YoY in 1H17 because of cont'd high capex, and the benefit of tower assets' disposal (2015) is gone.

Lee has an underperform rating on China Mobile with an HKD71.95 a share target price, which implies 18% downside. The stock is up 6% this year and trades at 14 times forward earnings.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.